Under the Superannuation Industry (Supervision) Act 1993, trustees of self-managed superannuation funds are required to present their financial statements, income tax returns and supporting workpapers for audit on an annual basis.
Whilst it does seem an onerous requirement to submit your accounts for an annual audit, it is an important safeguard designed to protect the integrity of self-managed superannuation funds, as well as your retirement benefits.
With this in mind, this article will explore some of the more common issues unearthed during the audit process:
- Failure to meet the ‘Sole Purpose’ test.
In order to meet the definition of a superannuation fund, the fund must at all times operate with the sole purpose to provide retirement benefits for its members. If for example, your fund owns an apartment in a holiday resort, the sole purpose test will be failed if any members or their associates make use of this apartment, as the investment now has two purposes; one, to provide retirement benefits and; two, to provide holiday accommodation for its members and/or associates.
- Failure to report assets at market values
Your SMSF’s investments must be reported at market value when preparing year end reports. This is especially monitored when a fund is paying a pension to any of its members. When looking at listed shares obtaining the market value is simple as the ASX reports by the minute what your shares are worth. However, when dealing with property investments this exercise can be costly depending on the relationship that trustees have with their real estate agent.
- Having investments held in the wrong name
Another common oversight is that super fund assets are recorded in the wrong name. For example, if your SMSF has a corporate trustee than all investments should note the name of the trustee on their reports (dividend statements, bank statements, etc.). However, it is quite common that these reports will have the name of the individual detailed instead. Even if the super fund’s name is also detailed, the fact that the wrong trustee is listed is an issue.
Whilst this one does seem pedantic, it is quite important to get right. Consider this, if the asset is in the name of the individual and not the trustee, what happens if the individual finds themselves in financial difficulty and is looking at bankruptcy? All of a sudden, the protections inherent in superannuation may be placed in jeopardy, all because the wrong name is recorded.
- Not having an investment strategy or not complying with an investment strategy
Many individuals start their own SMSF as they believe they can perform better than the retail and industry funds available in the market. However, if you don’t have an investment strategy, how do you know what performance metrics should be guiding your investment decisions. Further, many trustees have simple templated investment strategies in place that have no relevance to their investment activities. Your auditor will check your investment strategy to ensure that your investments comply.
- Have you considered personal insurances?
Trustees of super funds must always consider the insurance needs of their members and where required, obtain appropriate policies. Failure to consider this requirement could be an issue when your audit is completed.
- Improper Investments
Investing in related entities via capital injections or loans is strictly forbidden. If this does happen the ATO has the power to levy fines to each trustee of the fund of $10,800. As such, if there are 4 trustees of a fund, the total fine may be $43,200. These fines cannot be paid for with the funds held by the SMSF.
- Acquiring assets from related parties
With the exception of listed shares and business real property, SMSF’s are forbidden from acquiring assets from related parties. So, that residential property you own and would like to move to superannuation must stay where it is.
- Acquiring eligible assets from related parties at less than market value
Where you are eligible to transfer assets to your SMSF (as outlined at (2) above, listed shares and business real property), failure to move these investments across at market value will ensure you get a qualified audit report. Details of qualified audit reports are sent to the ATO.
The above list is in no way exhaustive of the issues that an auditor is reviewing when checking over your SMSF accounts. These are just the common issues for you to consider. Other issues that may be looked at include:
- Concessional contribution limits and proof of payment
- Non-concessional contribution limits and proof of payment, including the bring forward rules
- Pension amounts taken (minimum, maximum, TTR). Also, have they been physically paid?
- Have the preservation rules be followed
- Have the Taxable & Tax Free components been recorded correctly
- Family breakdown and how it impacts on your superannuation
- Bankruptcy of trustees
- Income tax issues
Establishing and running a SMSF can be rewarding and provide access to asset classes that are unavailable to general superannuation platforms (such as property). However, it is not a decision to be made lightly as the administration requirements can be prohibitive.
For more information as to whether a SMSF is appropriate for you please contact your trusted advisor at PJT Accountants & Business Advisors on (07) 5413 9300.
GENERAL ADVICE WARNING: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.
PJT Accountants & Business Advisors Pty Ltd CAR Number 1243046 ABN 75 116 182 873 is a Corporate Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361
Jodie Thompson ARN 277884, Wayne Patten ARN 277883, Matthew Dunn ARN 1243039 are Limited Authorised Representatives of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361